The ongoing sell-off in risk assets is accelerating as global markets react to tariff announcements. Dow futures dropped below 40,000, approaching 39,000, after China announced retaliatory tariffs.
The turmoil in the global economy raises the likelihood of a recession, increasing the expectations of Federal Reserve rate cuts in May and June. Current market conditions exhibit a sense of panic, which may lead to temporary price recoveries, but sustained rallies depend on changes in tariff policies or tax cuts.
Expected Market Volatility
Market volatility is expected to continue, with the VIX indicating substantial market fluctuations ahead.
With global equities reeling from the most recent bout of tariff escalation, we’re now seeing volatility grip the options and futures markets more tightly. The S&P 500 futures curve has begun to consistently reflect deeper inversions, pricing in elevated fear and uncertainty several weeks out. Short-dated implied volatility is being bid up sharply, while longer-dated contracts remain relatively flat, indicating that traders expect pockets of sudden market moves rather than a drawn-out collapse.
Given that retaliatory measures from major economies now directly impact production input costs and export margins, companies heavily reliant on cross-border supply chains are bearing the brunt. We’ve noticed a sharp uptick in hedging on industrials and semiconductors, particularly through put spreads and calendar structures—clear signs that institutional players are not expecting clarity in the near term.
Powell’s rate path expectations have shifted. With the data suggesting weaker factory output, coupled with consumer softness in several spending indicators, the pricing of two consecutive rate cuts within the next ninety days is no longer being treated as an outlier scenario. Term premiums are falling in tandem with yields, further fuelling the chances for sustained downward movement across yield-sensitive equity sectors.
Meanwhile, market breadth indicators are showing distress. We’ve tracked a continued fall in advance-decline ratios for major indices, a historically reliable signal that the average stock is struggling more than headline losses suggest. For position traders, especially those working in options, this is not a time to lean too heavily into directional bets without protection. Spreads with limited downside exposure—such as risk reversals with a slight bullish bias—are being favoured in pockets where volatility is overpriced.
Cboe Option Volume Surge
Cboe option volume surged by more than 30% over the last few sessions, with unusually high activity in protective structures. Interestingly, volume is clustering more in weekly expiries, indicating traders are unwilling to hold open risks for too long, reflecting extremely low confidence in market stability even on a one-week basis.
The current backdrop suggests caution in sizing and duration. We are rotating more into ranges and breakouts, given the lack of follow-through in previous lows being broken. Every leg down brings sharp snapbacks, led not by fundamental turnarounds but by mechanical covering and systematic buying algorithms kicking in around oversold levels.
Moreover, positioning in swaps markets shows increased speculation on volatility rather than directional bias. This implies that large funds are betting on disorder rather than a clear move up or down. Such conditions reward those who are selective and quick, and punishes anyone who overcommits too early.
The message from volatility curves, open interest shifts, and risk pricing is fairly direct: the market trusts little beyond the next five to seven trading sessions.
